Blue Ocean – Ch. 2 Analytics Tolls and Frameworks Analytical Tools and Frameworks Effective Blue On Strategy should be about Risk Minimization and not Risk Taking The US Wine Industry and ‘yellow tail’ from Australia U.S. Wine industry is $20 billion in size, yet 8 companies control 75% of the entire market This leaves 1,600 other wineries to compete for 25% for the rest of the market So with this in mind, how do you open up and capture a blue ocean of uncontested market space? The first answer lies in creating a STRATEGY CANVAS

Analytical Tools and Framework (cont) The Strategy Canvas It is both a diagnostic and an action framework for building blue ocean strategy First it captures the current state of play in the known market It shows you where the competition is currently investing The factors that the industry currently competes on in product, service and delivery It tells you what customers receive from the exiting competitive offerings Now lets paint the Strategy Canvas in graphic form for analysis First step is to define the principal FACTORS

Analytical Tools and Framework (cont) Seven Principal Factors of the US Wine Industry 1. Price per bottle of wine 2. Image in packaging, labels, wine medals won, use of esoteric enological terminology to stress art and science of wine making 3. Above the line marketing to raise consumer awareness in a crowded market, designed to encourage retailers to give prominence 4. Aging quality of the wine 5. The prestige of the Vineyard and its legacy 6. Complexity of the wine’s taste, including such things as tannins and oak 7. A diverse range of wines to cover all varieties of grapes and consumer preferences

HIGH LOW Price Use of Above Aging Vineyard Wine Range of enological the Line Quality Prestige Complexity Wines terminology Marketing & Legacy The STRATEGY CANVAS of the U.S. Wine Industry in the late 1990’s

Analytical Tools and Framework (cont) How do we shift the ‘strategy canvas’ of the wine industry? Reorient your focus from competitors to alternatives Reorient your focus from customers to noncustomers This helps you to get insight into how to redefine the problem the industry focuses on This helps you to reconstruct buyer value elements Casella wines from Australia redefined the industry problem by making a wine that was; FunNon-traditional Easy to drink for everyone WHY: Research showed that the great mass of American adults saw wine as a TURNOFF and SNOBBISH.

Analytical Tools and Framework (cont) The FOUR ACTIONS Framework Which of the factors that the industry takes for granted should be totally eliminated? Which factors should be reduced well below the industry’s standard? Which factors should be raised well above the industry’s standard? Which factors should be created that the industry has never offered?

Analytical Tools and Framework (cont) A New Value Curve REDUCE Which factors should be reduced well below the industry’s standard? CREATE Which factors should Be created that has not offered ? ELIMINATE Which of the factors that the industry takes for granted should go? RAISE Which factors should be raised well above the Industry’s standard?

Analytical Tools and Framework (cont) What did Casella do with the 4 action framework? First it broke the competitive landscape Rather than offering wine as wine, it created a social drink for everyone Beer drinkers Cocktail drinkers Other drinkers of non-wine beverages In 2 years became the fastest growing brand in the history of the US and Australian wine industry By 2003 it was the number one red wine in the US shipping 4.5 million cases Casella did not steal existing wine customers, it created a NEW MARKET OF THEM Casella acted on all four actions; eliminate, reduce, raise, create Easy drinking, Easy to select, Fun and Adventure

Analytical Tools and Framework (cont) Eliminate-Reduce-Raise-Create Grid: [yellow tail] ELIMINATE Enological terminology and distractions Enological terminology and distractions Aging qualities Aging qualities Above-the-line marketing Above-the-line marketingRAISE Price versus budget wines Retail store involvement REDUCE Wine complexity Wine complexity Wine Range Wine Range Vineyard prestige Vineyard prestigeCREATE Easy Drinking Easy Drinking Ease of selection Ease of selection Fun and adventure Fun and adventure

HIGH LOW Price Use of Above Aging Vineyard Wine Range of Ease of Fun and enological the line Quality Prestige Complexity Wines drinking/ adventure terminology marketing & Legacy selection

Eliminate-Reduce-Raise-Create Grid: (C du Soleil) ELIMINATE Star performers Star performers Animal shows Animal shows Aisle confessional sales Aisle confessional sales Multiple show arena Multiple show arenaRAISE Unique venue REDUCE Fun and humor Fun and humor Thrill and danger Thrill and danger CREATE Theme Theme Refined environment Refined environment Multiple productions Multiple productions Artistic music and dance Artistic music and dance

Analytical Tools and Framework (cont) Three Characteristics of a Good Strategy [yellow tail] created a unique and exceptional value curve to create Blue Ocean [yellow tail] strategy has FOCUS: it does not diffuse its efforts across key competitive factors The shape of its value curve diverges from the other players The tagline of their strategic profile is clear: a fun and simple wine to be enjoyed every day So the three complimentary qualities are; FOCUSDIVERGENCE COMPELLING TAGLINE

Analytical Tools and Framework (cont) Southwest Airlines FOCUS Friendly service Frequent point-to-point departures Speed No meals, no lounges, no seating choices, no hubs DIVERGENCE Keeping up with the competition makes you lose uniqueness By diverging away from competition, Southwest created a blue ocean COMPELLING TAGLINE A good strategy has a clear-cut and compelling tagline

HIGH LOW Price Meals Lounges Seating Hub Friendly Speed Frequent Class Connectivity Service point-to-point departures Southwest Avg. Airline Car transport

Analytical Tools and Framework (cont) Reading the Value Curve: The strategy canvas let’s you see the future in the present The value curve answers the question as to whether the business deserves to be a winner If your value curve converges with your competitors you will swim in red oceans, with high costs and slow growth Be careful about over promising and under delivering If your value curve is ‘zig-zag’ you do not have a coherent strategy K.I.S.S. and beware of jargon

The Spirit of Entrepreneurship

The myth is that a great Business Plan will be a high predictor of success – NONSENSE On a scale of 1-10 business plans rank 2 as a predictor of venture success What’s wrong with most of these “slick” business plans? MOST waste too much ink on NUMBERS and devote TOO LITTLE to the information that really matters to savvy investors MOST waste too much ink on NUMBERS and devote TOO LITTLE to the information that really matters to savvy investors Most financial projections past one year are an act of imagination They are typically wildly optimistic So what then are the really important factors that a Business Plan should have to attract investors?

How to Write a Great Business Plan Framework for a GREAT Business Plan The People – the men and women who will start, run and grow the venture. The outside parties who will provide key services (lawyers, accountants, suppliers) The Opportunity – a profile of the business itself, what it will make or sell and to whom, can it grow, how fast, what are the pitfalls? The Context – the big picture, regulations, interest rates, demographic trends, inflation – in other worlds things out of our control Risk and Reward – Assessment of everything that can go wrong and right, and how the team would respond

How to Write a Great Business Plan 1: The People The resumes are really important to investors, because having the right team is everything, without this nothing else really matters When the VC’s read the People Section they ask some very important questions; Where are the founders from, and where were they educated? Where have they worked, and for whom? What have they accomplished, both professionally and personally? What is their reputation in the business community? What direct experience have they had relevant to the opportunity? What skills, abilities and knowledge do they have? Who else needs to be on the team? Are they willing to recruit high-quality people? How well will they respond to adversity, have they done it in the past? How committed are they to the venture (skin in the game)? What are their motivations for the venture?

How to Write a Great Business Plan The Opportunity – There are two important questions (i) Is the total market for the venture’s product or service large and growing? (ii) Is the industry now, or can it become structurally attractive? 1.Who is the new venture's customers 2.How does the customer make decisions about buying this product or service 3.To what degree is the product or service a compelling purchase for the customer 4.How will the product or service be priced? 5.How will the venture reach all the identified customer segments? 6.How much does it cost (in time and resources) to acquire a customer? 7.How much does it cost to produce and deliver the product or service? 8.How much does it cost to support a customer? 9.How easy is it to retain a customer?

How to Write a Great Business Plan Understand the Competition (and move away from it) Who are the new venture's current competitors? What resources do they control? What are their strengths and weaknesses? Draw a ‘strategy canvas’ of the competition How will they respond to the new venture’s decision to enter the business? How can the new venture respond to its competitors’ response? Who else might be able to observe and exploit the same opportunity? Are there ways to co-opt potential or actual competitors by forming alliances?

How to Write a Great Business Plan The Context – The macroeconomic environment Inflation Interest and exchange rates Government regulations Tax and tariff policies Impact of technology Capital availability Consider the packaging industry before the Tylenol poison scare Predicting changes in the business landscape and how the venture will handle these changes

How to Write a Great Business Plan Risk and Reward A Business Plan is a quick snapshot of an event in he future That is a scary position to be in – the art of PREDICTION But it is not prediction as much as it is looking at a problem and seeing it as an opportunity in disguise It is about plausible and coherent strategies that will harness the opportunity Great business plans discuss People, Opportunity and Context as a moving target One of the greatest myths is that entrepreneurs are risk seekers, ALL SANE PEOPLE AVOID RISK. The Business plan must unflinchingly confront the risks ahead in terms of people, opportunity and context.